Volcker Sees High Risk of Economic Relapses: "Economy In For Long, Tough Slog"

Volcker Says âLong Way to Goâ for Full U.S. Recovery (Update2)
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By Peter J. Brennan, Christine Harper and Scott Lanman

Sept. 16 (Bloomberg) -- Paul Volcker, the former Federal Reserve chairman whoâs an economic adviser to President Barack Obama, said thereâs a âlong way to goâ before the economy returns to pre-recession levels.

âIt will be a long slog -- a matter of years -- with the risk of some relapses along the way,â Volcker said today at a financial conference in Beverly Hills, California. While Volcker said he sees signs that the economy is in the âearly stages of recovery,â he also warned that âit is way too soon to resume business as usual.â

He echoed Fed Chairman Ben S. Bernankeâs assessment yesterday that while the recession is probably over, âitâs still going to feel like a very weak economy for some time.â Volcker, who pushed the federal funds rate as high as 20 percent to throttle inflation in 1980, also renewed his call to restrict the activities of banks so large that their collapse would threaten the financial system.

âWe have a long way to go to get back the point of fully utilizing our economic resources and restoring something approximating full employment,â Volcker, 82, said at a conference hosted by the Association for Corporate Growth, a group for executives who deal with mergers and acquisitions.

At the same time, the economy is seeing âsome bounceâ from the lows of the downturn, Volcker said.

Banking Limits

In his speech, Volcker urged limits on the activities of banks that are considered âtoo big to fail,â going beyond what other officials in the Obama administration have advocated.

âI do not think it reasonable that public money --taxpayer money -- be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,â Volcker said.

Since January, Volcker has advocated that regulators should prohibit financial companies whose collapse would pose a risk to the economy -- those considered âtoo big to failâ -- from engaging in certain types of trading and investing activities. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.

âExtensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,â Volcker said. âSubstantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.â

âI want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,â he said.

Job Losses

Keith Hembre, a former Fed researcher whoâs now chief economist at U.S. Bancorpâs FAF Advisors Inc. in Minneapolis, said he agreed with Volckerâs economic outlook, given the jobless rate declined by less than 1 percent a year after past recessions.

âItâs multiple years before you get back to a point where youâre anywhere close to where anyone would view full employment,â Hembre said.

Bernanke, 55, who was nominated for a second term by President Barack Obama, told Congress in July that projected declines in the jobless rate over the next two years âwould still leave unemployment well aboveâ what Fed policy makers prefer in the long run.

Warren Buffett, the billionaire investor who runs Berkshire Hathaway Inc., said separately in an interview shown today on CNBC that the U.S. economy has âhit a plateau at bottom.â

Stocks Rise

U.S. stocks and yields on the 10-year Treasury note rose for a third day after a Fed report showed output at factories, mines and utilities climbed 0.8 percent last month. The Standard & Poorâs 500 Index climbed 1.5 percent to 1068.76, while the yield on the 10-year note rose to 3.47 percent at 5:14 p.m. in New York from 3.46 percent yesterday.

The unemployment rate reached 9.7 percent in August, a quarter-century high, and employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post-World War II economic downturn. The economy will rebound at a 2.3 percent pace next year, according to the median estimate in a Bloomberg News survey of economists.

In a question-and-answer session after his speech, Volcker said he backs putting a single agency like the Fed in charge of overseeing the financial system, instead of a committee made up of the heads of different agencies. The Obama administration has proposed giving the Fed oversight of the biggest financial companies, while some top lawmakers prefer a council.

âI donât think that function can be fulfilled by a conclave of regulators,â he said. âI do think we need an institution that has clear responsibility for overseeing the financial system.â